McGraw-Hill/Irwin

Designing Organizational Structures

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Merritt’s Bakery’s Evolving Organizational Structure Merritt’s Bakery has grown over the years, and throughout this growth the Tulsa, Oklahoma, company has adapted its organizational structure.

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Organizational Structure Defined • Division of labor and patterns of coordination, communication, workflow, and formal power that direct organizational activities • Relates to many OB topics (e.g. job design, teams, power, work standards, information flow) 13-3

Division of Labor  Subdividing work into separate jobs assigned to different people  Division of labor is limited by ability to coordinate work  Potentially increases work efficiency  Necessary as company grows and work becomes more complex 13-4

Coordinating Work Activities 1.

Informal communication • • • • Sharing information, forming common mental models Good for flexibility, nonroutine and ambiguous situations Easiest in small firms Larger firms apply informal communication through Liaison roles Integrator roles Concurrent engineering 13-5

Coordinating Work Activities 2.

Formal hierarchy • • • Direct supervision Assigns legitimate power to manage others Necessary in most firms, but has problems 3.

Standardization • • • Standardized processes (e.g., job descriptions) Standardized outputs (e.g., sales targets) Standardized skills (e.g., training) 13-6

Elements of Organizational Structure Department alization

Elements of Organizational Structure

Span of Control Formalization Centralization 13-7

KenGen’s Flatter Structure KenGen, Kenya’s leading electricity generation company, reduced its hierarchy from 15 layers to just 6 layers. “This flatter structure has reduced bureaucracy and it has also improved teamwork,” explains KenGen executive Simon Ngure.

Span of Control  • Number of people directly reporting to the next level Related to coordination through direct supervision  Wider span of control possible when: 1.

Other coordinating mechanisms are present 2.

Routine tasks 3.

Low employee interdependence

Tall vs Flat Structures  • • As companies grow, they: Build a taller hierarchy Widen span, or both  • • • Problems with tall hierarchies Overhead costs Worse upward information Focus power around managers, so staff less empowered

Centralization and Decentralization  Centralization -- Formal decision making authority is held by a few people, usually at the top  Decentralization increases as companies grow  • Varying degrees of centralization in different areas of the company Example: sales decentralized; info systems centralized Production Upper Mgt Information Systems Upper Mgt Middle Mgt Supervisory Middle Mgt Supervisory Front line Front line = locus of decision making authority Sales Upper Mgt Middle Mgt Supervisory Front line 13-11

Formalization  The degree to which organizations standardize behavior through rules, procedures, formal training, and related mechanisms.

 Formalization increases as firms get older, larger, and more regulated  • • • • Problems with formalization Reduces organizational flexibility Discourages organizational learning/creativity Reduces work efficiency Increases job dissatisfaction and work stress 13-12

TAXI’s Organic Structure TAXI, Canada’s creative agency of the decade, has an organic structure that relies on small teams, low formalization, and decentralized decision making . “We needed a flexible infrastructure, able to move with the pace of change,” says co-founder Paul Lavoie (right in photo with CEO Rob Guenette).

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Mechanistic vs. Organic Structures  • • • Mechanistic Structure Narrow span of control High formalization High centralization  • • • Organic Structure Wide span of control Low formalization Decentralized decisions 13-14

Effects of Departmentalization Specifies how employees and their activities are grouped together Three functions: 1.

Establishes chain of command 2.

Creates common mental models, measures of performance, etc 3.

Encourages staff to coordinate through informal communication 13-15

Functional Organizational Structure Organizes employees around specific knowledge or other resources (e.g., marketing, production) CEO Finance Production Marketing 13-16

Evaluating Functional Structures  • • • Benefits Economies of scale Supports professional identity and career paths Easier supervision  • • • Limitations More emphasis on subunit than organizational goals Higher dysfunctional conflict Poorer coordination -- requires more controls 13-17

Divisional Structure Organizes employees around outputs, clients, or geographic areas CEO Healthcare Lighting Products Consumer Lifestyle 13-18

Divisional Structure  • • • Different forms of divisional structure Geographic structure Product structure Client structure  Best form depends on environmental diversity or uncertainty 13-19

Globally Integrated Enterprise  • • • Fewer geographic divisions because: Less need for local representation Reduced geographic variation More global clients  • • • Globally integrated enterprise Connects work processes around the world rather than replicating them within each country or region Functional heads are geographically distributed Firm’s “home” country is no longer focus of business 13-20

Evaluating Divisional Structures  • • Benefits Building block structure -- accommodates growth Focuses on markets/products/clients  • • • Limitations Duplication, inefficient use of resources Specializations are dispersed--silos of knowledge Revising divisional structure emphasis produces politics and conflict among executives 13-21

Team-Based Structure     Self-directed work teams Teams organized around work processes Typically organic structure Usually found within divisionalized structure

Evaluating Team-Based Structures  • • • Benefits Responsive, flexible Lower admin costs Quicker, more informed decisions  • • • • • Limitations Interpersonal training costs Slower during team development Role ambiguity increases stress Problems with supervisor role changes Duplication of resources 13-23

Matrix Structure (Project-based) Employees ( ) are temporarily assigned to a specific project team and have a permanent functional unit CEO Game1 Project Leader Game2 Project Leader Game3 Project Leader Art Dept Leader Software Dept Leader Audio Dept Leader 13-24

Evaluating Matrix Structures  • • • • • Benefits Uses resources and expertise effectively Improves communication, flexibility, innovation Focuses specialists on clients and products Supports knowledge sharing within specialty Solution when two divisions have equal importance  • • • Limitations Increases goal conflict and ambiguity Two bosses dilutes accountability More conflict, organizational politics, and stress 13-25

Network Organizational Structure Alliance of firms creating a product or service Product development partner (France) Supporting firms beehived around a “hub” or “core” firm Accounting partner (USA)

Core Firm (USA)

Call center partner (Philippines) Package design partner (UK) Assembly partner (China) 13-26

Evaluating Network Structures  • • • Benefits Highly flexible Potentially better use of skills and technology Not saddled with same resources for all products  • • Limitations Exposed to market forces Less control over subcontractors than in-house 13-27

External Environment & Structure

Dynamic •

High rate of change • Use team-based, network, or other organic structure

Stable •

Steady conditions, predictable change • Use mechanistic structure

Complex •

Many elements (such as stakeholders) • Decentralize

Simple •

Few environmental elements • Less need to decentralize 13-28

External Environment & Structure (con’t)

Diverse •

Several products, clients, regions • Use divisional form aligned with the diversity

Integrated •

Single product, client, place • Use functional structure, or geographic division if global

Hostile •

Competition and resource scarcity • Use organic structure for responsiveness

Munificent •

Plenty of resources and product demand • Less need for organic structure 13-29

Effects of Organizational Size  As organizations grow, they have: More division of labor (job specialization)  Greater use of standardization  More hierarchy and formalization  More decentralization 13-30

Technology and Structure  Technology refers to mechanisms or processes by which an organization turns out its product or service  • • Two contingencies: Variability -- the number of exceptions to standard procedure that tend to occur. Analyzability -- the predictability or difficulty of the required work 13-31

Organizational Strategy  • • Structure follows strategy Strategy points to the environments in which the organization will operate Leaders decide which structure to apply  • Innovation strategy Providing unique products or attracting clients who want customization  • Cost leadership strategy Maximize productivity in order to offer competitive pricing 13-32

Designing Organizational Structures